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Sooo... what happens if the returns are negative? Does the fund manager cop 20% of the loss? What happens if the gross return is 2.5%? Does the fund manager st

• solutionyogi 15y ago
  I don't know who downvoted you but that's a valid question. No, if the fund doesn't make money, they don't get performance fee NOR do they have to take 20% of the loss. Also, the 20% performance fee is applied on the 'Net Gain' and not gross return. E.g. Going back to my example, if hedge fund made, 10MM on 100MM assets. They will first pay themselves 2MM and charge 20% performance fee on 8MM and not 10MM. Again, investors are not stupid either, if the hedge fund can't show them gains, they will take their money somewhere else. [Obviously they can still become victim to Madoff like outright fraud.]
• Gaussian 15y ago
  This is exactly the rub. Managers take no haircut when the fund gets hammered. It is true that most managers won't take a profit on investor's money until they return to the "high water mark" of how much $$$ that investor originally put into the fund, but often times when a fund loses too much money, the manager simply closes it and opens another, therefore dodging the high water mark requirements. But honestly, if rich people can't figure out that their fund manager is ripping them off, then to hell with them. Fund managers, at least, prey on people who are already rich. Better than a lot of other sleazes who take advantage of the undereducated and poor. I'm not saying it's right, I'm just saying that if you have enough money to write John Paulson a check, then you should know what you're doing. I can't say the same for an old woman in a bad neighborhood who was talked into refinancing her house of 50 years so she could take out cash to buy a conversion van. The people who preyed on her are far worse, in my mind, than your average fund manager who does nothing of virtue for his clients.
  • solutionyogi 15y ago
    I completely agree. At least in the hedge fund world, they have to work hard to get in the money. [They can't advertise in traditional media.]
  • ams6110 15y ago
    People (and actually it's institutions, mostly) who invest in hedge funds are sophisticated investors. They know full well what the managers are being paid and presumably feel they are worth it.
    • hessenwolf 15y ago
      Ha ha. Good one. What are you basing this on?
      • ams6110 15y ago
        The fact that they keep their money with the manager? Sure there might be a few people who don't know what they are doing (lottery winners?) but if you have enough money to buy into a hedge fund, you more than likely are paying attention.
        • hessenwolf 15y ago
          I don't see why you think A applies B at all here. I have worked both in institutional investment and in a hedge fund, and it's pretty fucking hard to read a term sheet for anybody.
    • danssig 15y ago
      They were back when they were regularly producing 12-20% returns. That hasn't been the case for years. I can't imagine why anyone is still in a 2/20 hedge.
  • drumdance 15y ago
    Managers take no haircut when the fund gets hammered Which is exactly why I think carried interest should be taxed as ordinary income. /soapbox
• danssig 15y ago
  >Does the fund manager cop 20% of the loss? Of course not. This idea that the person who carries the most (financial!) risk gets the biggest pay off rarely actually exists in the real world.